- Gold prices were trading in positive territory around $2,580 in early Asian hours on Monday.
- Growing expectations of a Federal Reserve rate cut and persistent geopolitical risks continue to support gold prices.
- A slowdown in economic activity in China could put pressure on precious metals prices.
Gold prices (XAU/USD) gained momentum around $2,580 in early Asian trading hours on Monday. Gold hit an all-time high of $2,586 on Friday amid growing expectations of a significant interest rate cut by the Federal Reserve. Attention will be focused on Wednesday's Federal Open Market Committee (FOMC) meeting.
Speculation that the Fed may cut interest rates has risen after U.S. economic data suggested a slowdown, sending gold prices higher as lower interest rates reduce the opportunity cost of holding non-yielding gold. Financial markets are currently pricing in a 48% chance of a 25 basis points (bps) cut in U.S. interest rates at the Sept. 17-18 meeting, with a 52% chance of a 50 bps cut, according to the CME FedWatch tool.
“We're heading into a low interest rate environment, making gold more attractive. I think rate cuts are likely to come more frequently, rather than larger,” said Alex Evkarian, chief operating officer at Allegiance Gold.
Additionally, ongoing geopolitical tensions in the Middle East have further supported safe-haven gold prices. Israeli Prime Minister Benjamin Netanyahu said on Sunday that Yemen's Houthis will pay a “heavy price” after a missile fired by them landed in central Israel, the BBC reported.
Still, economic weakness and concerns about a slowdown in China's economy could limit precious metals prices' gains, as China is the world's largest producer and consumer. China's August retail sales and industrial production fell short of expectations. Industrial production grew at the slowest pace since March, while retail sales were the second-slowest month this year.
Gold FAQ
Gold has played a vital role throughout human history, as it has been widely used as a store of value and a medium of exchange. Today, apart from its luster and use in jewellery, the precious metal is widely recognised as a safe haven asset and considered a good investment during volatile times. Gold is also widely seen as a hedge against inflation and currency depreciation, as it is not tied to any particular issuer or government.
Central banks are the largest holders of gold. To support their currencies in times of uncertainty, central banks tend to buy gold to diversify their reserves and to impress upon them the strength of their economies and currencies. Large gold reserves can be a source of confidence in a country's solvency. According to data from the World Gold Council, central banks added 1,136 tonnes of gold worth about $70 billion to their reserves in 2022, the highest annual purchase since records began. Central banks in emerging countries such as China, India and Turkey are rapidly increasing their gold reserves.
Gold is inversely correlated with the US Dollar and US Treasury Bonds, which are the primary reserve and safe haven assets. When the US Dollar falls, gold tends to rise, allowing investors and central banks to diversify their assets during volatile times. Gold is also inversely correlated with risk assets. Rising stock markets tend to drive gold prices down, while sell-offs in risky markets tend to favor the precious metal.
Gold prices fluctuate due to a variety of factors. Geopolitical instability or fears of a deep recession can send gold prices soaring due to gold's status as a safe haven. As a non-yielding asset, gold tends to rise in value the lower interest rates are, but rising cost of funds typically weighs on gold. Still, since the asset is priced in dollars (XAU/USD), most of the movement is determined by the movement of the US Dollar (USD). A strong dollar tends to suppress gold prices, while a weak dollar can boost gold prices.
